Institutions, Advisers Agree Somewhat about Alternatives

The survey, conducted by Morningstar, Inc. and Barron’s, found that “both institutions and advisers want alternative investments that are liquid, transparent, and regulated like traditional investments,” said Steve Deutsch, director of separate accounts and collective investment trusts at Morningstar.

Survey respondents, asked to identify the top three reasons to hesitate to invest in alternatives, cited:

A third of institutional investor respondents thought that alternative investments would become as important as traditional investments over the next five years, while 17% thought they would become somewhat more important, and 13% “much more important.’ On the other hand, nearly a quarter thought they would become much less important (13% said somewhat less important). Advisers showed similar but slightly lower importance predictions (27% as important; 13% somewhat important; 12% much more important).

Other Findings

Among the survey’s other findings:

Limited partnerships, including hedge funds, direct real estate, and private equity, are the most popular alternative vehicles for institutions.

Almost half of institutions surveyed allocate more than 10% of their portfolios to alternative investments, and nearly one-in-five allocate more than a quarter of their portfolios to alternatives.

Institutions generally expect their portfolio allocations to alternative investments, particularly hedge funds and private equity, to increase over the next five years. In fact, close to a quarter (23%) of institutions expect to invest more than 25% of their portfolios into alternatives.

The survey also noted that the “previous excitement seen over 130/30 and all manner of leveraged net-long investment strategies appears to have diminished.’ In fact, more than 70% of institutions expect assets invested in leveraged net-long strategies to remain unchanged in 2009.

The survey results showed that advisers and institutions both agree and disagree on what is and isn’t an alternative investment. According to Morningstar, institutions have a more pronounced view of what is and isn’t an alternative investment. When asked what defines alternatives, respondents said: